Bank of Japan Deputy Governor Shinichi Uchida has signaled the bank's readiness to continue increasing policy interest rates, contingent upon the realization of positive economic and inflation forecasts. Speaking at a financial and economic conference on March 5, 2025, Uchida stated, "If the outlook for the economy and inflation is achieved, the bank will continue to raise policy interest rates and adjust the degree of monetary easing".
Uchida emphasized the need for cautious and measured adjustments, clarifying, "While we will continue to raise interest rates, it is important to check the economy's response during the process of increasing rates". This careful scrutiny is particularly pertinent as Uchida expressed concerns over the natural interest rate's wide range, which he believes undermines its practical utility for economic policy decisions.
The Bank of Japan's most recent interest rate adjustment occurred during the Monetary Policy Meeting in January 2025, when it was raised from approximately 0.25% to 0.5%. Uchida reiterated his belief, stating, "A policy interest rate of around 0.5% is sufficiently accommodative and firmly supports the economy".
At the same conference, Uchida projected, "Both the actual inflation rate and the underlying inflation rate, which reflects the rise of wages, will stabilize at around 2% sometime between the latter half of fiscal year 2025 to fiscal year 2026". His forecast intends to align policy measures with economic realities, advocating for careful analysis as the bank navigates this transitional phase.
Touching on external factors, Uchida remarked on the uncertainties posed by the international economic climate, primarily due to shifting policies of the new US administration and increasing geopolitical tensions. He noted, "Such events could impact international capital markets and the confidence of companies and households".
The slight increase in inflation rates has been attributed to various factors, including rising food prices, particularly rice, which Uchida mentioned as part of the underlying inflation issues the bank is currently monitoring. "The rate of increase in the consumer price index is rekindling, influenced significantly by the rise of staple goods' prices," he explained.
Uchida, addressing criticisms leveled against the bank's expansive monetary policy and its unintended consequences, acknowledged the notion of so-called "zombie companies" surviving on low-interest rates. He countered, asserting, "Monetary easing has had positive effects, enhancing employment for younger generations who followed the 'employment ice age' period".
Nevertheless, he also recognized the responsibility of the government to address potential fiscal discipline issues if they arise from the central bank's policies. "If there are concerns of fiscal relaxation, it is up to the government to manage those effects," Uchida stated.
Market reactions have been mixed following the BOJ’s communications, with predictions concerning anticipated future interest rate hikes becoming increasingly common. The yield on the ten-year government bond recently climbed to 1.455%, the highest level seen over the past 15 years, driven partly by economic indicators surpassing expectations.
Uchida noted, "We must analyze how the economy reacts as we adjust interest rates. The financial environment necessitates flexibility; should exceptional circumstances arise, such as rapid interest rate increases, we will be prepared to adjust our bond purchasing strategy accordingly".
Reflecting on the BOJ's historical policy decisions, Uchida referred to the "Multi-faceted Review" conducted on the bank's operations over the last quarter-century. This extensive analysis shed light on the prolonged period of economic stagnation and the role played by ultra-low interest rates.
Looking toward the future, Uchida underscored the importance of balancing operational strategies and clear communication with the market. He urged, "Both ingenuity and balance will be necessary as we navigate the transition from large-scale monetary easing to new policies".
Overall, Uchida's remarks reveal the BOJ's commitment to flexible and responsive monetary policy management, as the institution seeks to balance economic recovery with inflation stabilization. His forward-thinking approach suggests the bank will remain vigilant as it faces both domestic challenges and the uncertainties of global markets.